Non-Monetary Consideration

Dealing with a lot of technology start ups as I do, one of the most common issues we see is third parties providing supplies to our client in return for shares, and whilst that is the case it is surprising how few people actually understand the income tax and VAT position on such a transaction. HM Treasury have now recognised that this is an issue and clarified the law in statute whereas reliance was always placed upon case law.

From an income tax point of view it doesn’t matter whether you are paid in cash, in shares, or with some other property, if you have provided services in return for that asset you are taxable upon the value of it. Of course with cash it is much easier to establish the actual value, whereas with shares this becomes more esoteric, particularly in a start up. Often such suppliers believe that by providing services for shares they will not have to pay tax on any profit on their services – this is incorrect and this amendment to the law now underlines that in a big way.

So how do you value the shares? Well this is a good question and one which I consider regularly – should you value the services provided and drive the share value based on the value of the service, or is it the value of the shares, and if so what is the value of a share in a company that hasn’t yet sold anything? This can be hard, but clearly people don’t do things for absolutely nothing so these shares must have a value.

Secondly we need to consider the VAT position – and this is where the tech start up needs to have its wits about it. VAT similarly is chargeable on the market value of the asset given in consideration where a barter transaction is taking place. The onus is on the supplier if they are based in the UK – but if the supplier is overseas it is actually the tech start up that needs to consider the point because the VAT needs to be accounted for via the reverse charge mechanism and that is its responsibility to get right.

Thus, the clarification of the existing position is very welcome in many ways as it codifies the position that I understood it to be and allows parties to such a transaction to enter it knowing exactly what the tax outcomes truly are.

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